The Negative Impact of the Coronavirus Pandemic on the Forex Market
The coronavirus or COVID-19 disease that emerged in the month of December in 2019 has killed thousands of people and infected over 10 of thousands individuals across the globe. After the World Health Organization declared the coronavirus outbreak as a pandemic, economies and markets around the world have been negatively impacted, resulting in a massive slow down. While stock market such as Dow Jones recorded its largest slump in history, even the forex market as well as the forex traders around the globe have been deeply affected.
Below, take a look at the impact of the coronavirus on the forex market.
At a meeting held on the 12th of March, the ECB or the European Central Bank announced an additional stimulus to deal with the economic effect of COVID-19 but also disappointed the markets by not lowering the rates of interest. It must be noted that many investors favoured the greenback because it is one of the most liquid currencies of the world and also because it is considered as a safe haven. The increased demand for USD was reflected in a sharp drop in the EUR/USD.
As far as GBP/USD is concerned, the pair witnessed consecutive losses and even crashed to its lowest at $1.1757 since 1985. The slump was recorded after the BoE (Bank of England) reduced its base rate of interest to 0.25percent. Clearly, the fear of coronavirus on the global economy is driving many traders to selloff their currencies. Apart from this, other factors like the deficit in the United Kingdom’s current account as well as Brexit have also weighed the sterling down.
The AUD/USD dropped to its 17-year low last month even as Australia is likely to witness a recession as well as the commodity prices in the country have fallen. China is one of the biggest trading partners of Australia and the news pertaining to the economic situation in China has had a massive impact on the AUD.
Given that the renminbi, which is the official currency of China, can trade only within a limited range, investors tend to use the Australian Dollar in the form of a proxy for the Republic of China. Basically, the AUD is considered to be a ‘risky currency’ which investors usually avoid during unstable trading conditions. Now, with the rapid spread of the coronavirus, the currency will continue to witness pressure in the days to come.
The yen is often considered as a safe haven by many forex traders, particularly because of Japan’s predominance as the globe’s biggest creditor nation. Other currencies that are also regarded as a safe haven are the USD, Swiss franc as well as gold. In the wake of the rise of the coronavirus pandemic, many investors flocked towards the yen, but due to recent sell off of the equities, the USD/JPY pair has witness a major rebound.
The USD/CAD touched the highest mark since the month of January in 2016. The CAD, which is sensitive to risk, dropped even as the prices of crude oil plunged to its lowest since the year 2002. With Canada being one among the largest producers of oil in the globe, the coronavirus pandemic will obviously impact crude oil’s demand, pressurising the prices as well as weighing the CAD down.